Snap Election Risks Rising In Australia

We believe that the risk of snap elections in Australia has risen following the ousting and subsequent resignation of ex-PM Malcolm Turnbull on August 24.

Despite support for the government trailing behind the main opposition Australian Labor Party, personality politics could still see the Liberal-National coalition turn around its weak popularity over the coming months.

We expect some level of disruption to government policies over the near term as the coalition seeks to shore up its support ahead of next federal elections, which must be held by November 2019.

Policy Continuity Most At Risk

Australia - Short-Term Political Risk Index Score, Out of 100

Source: Fitch Solutions

The ruling Liberal-National coalition ousted Australia's then Prime Minister (PM) Malcolm Turnbull on August 24 and this subsequently saw Turnbull resign from parliament in the week that followed. As a result of Turnbull's resignation (and his vacant parliament seat), a by-election has been called in Wentworth on October 20 to fill this seat. Although the Division of Wentworth has historically been a Liberal party stronghold, with the seat having been under the party since 1944, we highlight the risk of this seat being won by the opposition Australian Labor Party (ALP), which could mean a loss of majority for the ruling coalition, and subsequently triggering snap federal elections. Our short-term political risk score stands at 74.8 (out of 100), and we will be looking to revise this score lower if the ALP wins the Wentworth by-election.

Given that personality politics have a strong impact on the respective party's electoral odds, we believe that the onus will be on PM Scott Morrison to turn around the poor support for the ruling coalition over the coming months. Failure to which could see the ALP form the government following the next federal elections, which has to be completed by November 2019.

All Eyes On Wentworth

We believe that the likelihood of the ALP winning the parliamentary seat in Wentworth has risen, and this has negative ramifications for political stability over the coming months. The latest opinion poll for the by-election conducted in early September puts support for the ALP at 53% and the Liberal Party at 47%, although, of course, one opinion poll does not necessarily show a trend towards one party or another. In our view, this potentially sets the stage for a close race in supposedly one of the Liberal Party's 'safest' seat in October.

As of September 14, PM Morrison has selected Dave Sharma to be the Liberal candidate in the Division of Wentworth. In our view, Sharma, who has held senior government positions such as Australia's ambassador to Israel between 2013 and 2017, and the head of the International Division of the Department of the Prime Minister and Cabinet between 2010 and 2012 stands out as a strong contender for the seat. That said, we view the Wentworth electorate's strong support for Turnbull as a double-edged sword at this by-elections. While Turnbull's demonstrated support for Sharma is likely to rally some support towards the Liberal party candidate, the ruling coalition's ousting of Turnbull could have also caused dissatisfaction among his supporters, causing support to swing towards the ALP.

Should the ALP be successful in wresting the seat from the Liberals, this would put the Liberal-National coalition at 75 (out of 150 seats) seats in the House of Representatives, on par with the total number of seats held by the ALP together with the crossbenchers, posing a challenge for the coalition to remain in power. This could spark snap federal elections if the ruling coalition fails to gain the support from at least one crossbencher in parliamentary votes, raising political uncertainty in Australia over the coming months.

Government Losing Favour Among Voters

Australia - Political Party Preference, %

Source: Newspoll, Fitch Solutions

Liberal's Saving Grace Could Be PM Preference

Based on the latest opinion poll conducted by Newspoll, support for the ruling coalition has fallen further behind the opposition ALP following Turnbull's removal, with the coalition and ALP's support at 44% and 56%, respectively, at the end of August, as compared to 49% and 51% in July. We believe that this bodes poorly for the ruling coalition parties' electoral odds, particularly should a snap election happen at short notice.

'Netball Dad' PM Morrison In The Lead

Australia - Opinion Polls For Preferred Prime Minister, %

Source: Newspoll, Fitch Solutions

That said, we believe that a saving grace for the ruling coalition could stem from the important role of personality within Australian politics, which saw the Liberal-National coalition get re-elected to government with the help of then-PM Turnbull at the 2016 federal elections, despite the coalition lagging behind the ALP at the opinion polls. Opinion polls in September following Turnbull's ousting show that Morrison is the preferred candidate for PM, pulling ahead of ALP leader, Bill Shorten, just a fortnight after taking the nation's top job. In our view, this indicates that voters are willing to give Morrison a chance to prove his ability to bring about continued economic development to Australia.

Given that Morrison will lead the Liberal-National coalition in the next federal elections, we believe that he will have to also undertake the tall order of shoring up support for the coalition. This could see a disruption in some policies over the near term in a bid to please voters. In particular, we believe that the previously Turnbull-led coalition's initial plan to cut AUD2.2bn worth of university funding and to cap the level of student loans will be a hot topic for debate over the coming months. Considering that this issue has brought about significant backlash from the ALP, and that subsequent implementation could carry negative connotations regarding the government's policies prioritising corporates' interest above the people's needs, we believe a policy U-turn from Morrison is likely. As policies such as corporate tax cuts and infrastructure investment under the government have largely improved the domestic business environment, a reversal of these policies and disruption to planned infrastructure projects would likely bode poorly for businesses in the country.